Portfolio Rebalancing in General Equilibrium

Working Paper No. 24722 This paper develops an overlapping generations model of optimal rebalancing where agents differ in age and risk tolerance. Equilibrium rebalancing is driven by a leverage effect that influences levered and unlevered agents in opposite directions, an aggregate risk tolerance e...

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Bibliographic Details
Published in:NBER Working Paper Series 2018-06, p.24722
Main Authors: Kimball, Miles S, Shapiro, Matthew D, Shumway, Tyler, Zhang, Jing
Format: Article
Language:English
Subjects:
Economic models
Economic theory
Hedging
Macroeconomics
Risk
Wealth distribution
Online Access:Get full text
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Summary:Working Paper No. 24722 This paper develops an overlapping generations model of optimal rebalancing where agents differ in age and risk tolerance. Equilibrium rebalancing is driven by a leverage effect that influences levered and unlevered agents in opposite directions, an aggregate risk tolerance effect that depends on the distribution of wealth, and an intertemporal hedging effect. After a negative macroeconomic shock, relatively risk tolerant investors sell risky assets while more risk averse investors buy them. Owing to interactions of leverage and changing wealth, however, all agents have higher exposure to aggregate risk after a negative macroeconomic shock and lower exposure after a positive shock.
ISSN:0898-2937
DOI:10.3386/w24722